Accounting Process

for a
Service Entity

A practice set in
Fundamentals of Accountancy,
Business and Management, Part
1

CHER J’S, LPT, CERTIFIED BOOKEEPER

Name: __
Section: ____
Instructor: __

1
 Preface

I am glad to provide you this humble piece of work for a simplified instruction and practice of the

steps of the accounting cycle. This material covers the basic concepts of accounting and the

proper manner of recording, summarizing and preparation of financial reports for a service entity.

This material will test your knowledge on basic concepts you need to understand, and a sample

case on the whole accounting process which include journalizing, posting, preparation of a trial

balance, worksheet, preparation of financial statements, and closing process.

The practice set is about a service entity. For simplicity, no specific service line has been used in

order to focus more on the proper treatment of transactions.

We hope this material will be useful in your development of accounting concepts and proper

treatment of different business transactions.

CHER J’S, LPT, CERTIFIED BOOKEEPER

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 Contents
Concepts you need to understand 4

Accounting Process 6

Practice Set Proper 7

General Journal 9

General Ledger 14

Trial Balance 26

Summary of adjustments 27

Worksheet 28

Statement of Financial Position 29

Statement of Comprehensive Income 30

Statement of Changes in Equity 31

Statement of Cash Flows 32

Post-closing Trial Balance 33

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 Concepts you need to understand
Accounting is a service activity. Its main function is to provide quantitative information,
primarily financial in nature, about economic entities, that is intended to be useful in making
economic decisions, and in making reasoned choices among alternative courses of action.

There are two users of accounting information, namely, internal users and external users.
Internal users are the decision-making individuals inside the business/mismong owner.
External users are individuals outside the business which includes customers and the general
public/customers, government.

The financial statements of an entity includes the following elements:

 Assets are resources controlled by the entity as a result of past events and from which
future economic benefits are expected to flow to the entity.
 Liabilities are present obligations of the entity arising from past events, and the
settlement of which is expected to result in an outflow from the entity of resources
embodying economic benefits.
 Equity is the residual interest in the assets of the entity after deducting all of its liabilities.
 Income is the increase in economic benefits in the form of inflows of assets or decreases
of liabilities.
 Expenses are decreases in economic benefit during the accounting period in the form of
outflow or decrease in asset or increase in liability.

The basic accounting equation is:

Assets = Liabilities + Owner’s Equity

The rules of debit and credit are as follows:

Element DEBIT CREDIT

Asset + -
Liability - +
Capital - +
Withdrawals + -
Revenue - +
Expenses + -

As an example, let us assume that Mr. Lee will open Lee Services. Let us look at the inflow and
outflow of the different elements of financial statements in the tabular analysis below.

Assets Liabilities Capital

Accounts Accounts Notes Lee,
Cash Receivable Supplies Equipment Payable Payable Capital
The owner invested P100,000 to open Lee Services
100,000 100,000
Bought supplies worth P8,500 in cash.
(8,500) 8,500
The business bought equipment, on account, amounting to P50,000
50,000 50,000
Borrowed money from a bank, P15,000, with a written note of promise to pay.
15,000 15,000
Paid half the price of the equipment purchased on account.
(25,000) (25,000)

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 Accounts Accounts Notes Lee,
Cash Receivable Supplies Equipment Payable Payable Capital
Purchased additional supplies on account amounting to P3,000.
3,000 3,000
The owner withdrew an amount of P10,000 for personal use.
(10,000) (10,000)
Rendered services to customers, receiving cash amounting to P15,000.
15,000 15,000
Rendered services to customers on account, P17,000
17,000 17,000
Paid rent for the month, P1,500
(1,500) (1,500)
Collected P3,000 on account from one customer.
3,000 (3,000)
Paid water and electricity expenses, totaling P3,650.
(3,650) (3,650)
Used P2,5000 worth of supplies.
(2,500) (2,500)
This period’s salaries worth P4,700 payable next month.
4,700 (4,700)
84,350 14,000 9,000 50,000 32,700 15,000 109,650
157,350 157,350

Specific transactions need to be adjusted at the end of the accounting period for a proper balance
reporting of the elements of financial statements:

 Prepaid expenses, of which the expired portion be reported as expense and the unexpired
portion reported as asset.
 Unearned revenues, of which the earned portion be reported as revenue and the
unearned portion reported as a liability.
 Accruals of revenues and expenses, though not paid or received but the transaction
happened during the period.
 Depreciation of property and equipment due to wear and tear.

An entity shall present the following at the end of the accounting period:

 Statement of Financial Position, which reports the financial position of the entity based
on assets, liabilities and owner’s equity.
 Statement of Comprehensive Income, which reports the financial performance of the
entity based on revenues and expenses.
 Statement of Changes in Equity, which reports the changes in equity based on financial
performance and equity movements.
 Statement of Cash Flows, which reports the cash inflow or outflow based on operating,
investing and financing activities.
 Notes and disclosures which presents detailed information on the items on the face of the
financial statements.

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 Accounting Process
This material will encompass the eleven steps of the accounting cycle, as follows:

1. The source documents are prepared and analyzed.

2. Journalizing

3. Posting

4. Preparation of an initial unadjusted trial balance.

5. The documents for adjustments are analyzed.

6. Preparation of a worksheet.

7. Preparation of financial statements.

8. Journalizing and posting of adjusting entries.

9. Journalizing and posting of closing entries.

10. Post-closing trial balance of real accounts are prepared

11. Reversing entries.

ADE/LCR

ASSET – DRAWINGS- EXPENSES – LIABILITIES –

CAPITAL - REVENUE

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 Practice Set Proper
Miss Seolhyun Kim, a Korean expatriate living here in the Philippines for seven years now, plans
to open a business in our country. She plans to open a service company which she willcall
Seolhyun Services. The entity will commence on the first day of the year, January 1, 2017.

Transactions on the first month of operations of Seolhyun Services are given as follows:

January 01 Miss Seolhyun Kim invested P500,000 cash to open Seolhyun Services.

January 02 The entity bought P5,000 worth of office supplies, paid in cash.

January 03 Bought a small automobile on account amounting to P120,000. Also

bought an equipment paying cash of P65,000.

January 04 Paid an insurance policy, charged to prepaid insurance account, P18,960

good for two years.

January 05 Paid a fourth of the price of the automobile.

January 08 Rendered services to customers, receiving cash of P2,300.

January 09 Rendered services to customers, P6,320 on account.

January 10 Rendered services to customers, receiving cash of P5,000.

January 12 Paid another fourth price of the automobile.

January 14 Rendered services to customers, P8,000 on account.

January 15 Paid half-moth salaries of three employees, P4,680 each.

January 17 Rendered services to customers, receiving a note of promise to pay

P12,000.

January 19 Due to an emergency, Kim Seolhyun withdrawn an amount of P15,000.

January 22 The business bought an additional P3,000 worth of office supplies, paid in
cash.

January 23 Rendered services to customers, receiving cash of P4,500.

January 26 Rendered services to customers, P3,560 on account.

January 27 Collected the account of January 9 and 14.

January 28 Paid utility bills worth P2,450.

January 29 Paid this month’s rent, P3,650.

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Upon analysis of the documents, the following shall be considered for month-end reporting:

 P3,400 worth of office supplies were used up.

 Record the insurance expired for the month.
 The equipment has a salvage value of P25,000 and expected to be usable for 7 years.
 The automobile has a salvage value of P40,000 and expected to be suable to 5 years.
 Payable half-month salaries, P4,680 for only one employee.
 Telephone bills payable the next month, P2,500.

The financial reporting intervals will be on a monthly basis, ending the first month of operations
at January 31, 2017.

You are required to prepare the following:

1. Completed general journal and general ledger

2. Initial unadjusted trial balance and summary of adjustments
3. Worksheet
4. Statement of Financial Position
5. Statement of Comprehensive Income
6. Statement of Changes in Equity
7. Statement of Cash Flows
8. Adjusting and closing entries journalized and posted
9. Real accounts post-closing trial balance
10. Reversing entries, if any.

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GENERAL JOURNAL (1)

Date Description PR Debit Credit

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GENERAL JOURNAL (2)

Date Description PR Debit Credit

10
GENERAL JOURNAL (3)

Date Description PR Debit Credit

11
GENERAL JOURNAL (4)

Date Description PR Debit Credit

12
GENERAL JOURNAL (5)

Date Description PR Debit Credit

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GENERAL LEDGER (1)

Cash Account no. 101

Date Items PR Debit Credit Balance
1 investment 500,000 500,000
2 Purchses of supplies 5000 495,000
3 Purchase of equipment 65,000 430,000

Accounts Receivable Account no. 102

Date Items PR Debit Credit Balance

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GENERAL LEDGER (2)

Notes Receivable Account no. 103

Date Items PR Debit Credit Balance

Office Supplies Account no. 104

Date Items PR Debit Credit Balance

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GENERAL LEDGER (3)

Automobile Account no. 105

Date Items PR Debit Credit Balance

Accumulated Depreciation - Automobile Account no. 106

Date Items PR Debit Credit Balance

16
GENERAL LEDGER (4)

Equipment Account no. 107

Date Items PR Debit Credit Balance

Accumulated Depreciation - Equipment Account no. 108

Date Items PR Debit Credit Balance

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GENERAL LEDGER (5)

Prepaid Insurance Account no. 109

Date Items PR Debit Credit Balance

Accounts Payable Account no. 201

Date Items PR Debit Credit Balance

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GENERAL LEDGER (6)

Salaries Payable Account no. 202

Date Items PR Debit Credit Balance

Utilities Payable Account no. 203

Date Items PR Debit Credit Balance

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GENERAL LEDGER (7)

Kim Seolhyun, Capital Account no. 301

Date Items PR Debit Credit Balance

Kim Seolhyun, Withdrawals Account no. 302

Date Items PR Debit Credit Balance

20
GENERAL LEDGER (8)

Profit or Loss Summary Account no. 303

Date Items PR Debit Credit Balance

Service Revenue Account no. 401

Date Items PR Debit Credit Balance

21
GENERAL LEDGER (9)

Office Supplies Expense Account no. 501

Date Items PR Debit Credit Balance

Insurance Expense Account no. 502

Date Items PR Debit Credit Balance

22
GENERAL LEDGER (10)

Depreciation Expense - Automobile Account no. 503

Date Items PR Debit Credit Balance

Depreciation Expense - Equipment Account no. 504

Date Items PR Debit Credit Balance

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GENERAL LEDGER (11)

Salaries Expense Account no. 505

Date Items PR Debit Credit Balance

Utilities Expense Account no. 506

Date Items PR Debit Credit Balance

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GENERAL LEDGER (12)

Rent Expense Account no. 507

Date Items PR Debit Credit Balance

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 Seolhyun Services
Trial Balance (initial and unadjusted)
January 31, 2017

Accounts Debit Credit

Cash
Accounts receivable
Notes receivable
Office supplies
Automobile
Equipment
Prepaid insurance
Accounts payable
Kim Seolhyun, Capital
Kim Seolhyun, Withdrawals
Service revenue
Salaries expense
Utilities expense
Rent expense

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 Summary of adjustments
For the month ended January 31, 2017

 P3,400 worth of office supplies were used up.

 Record the insurance expired for the month.

 The equipment has a salvage value of P25,000 and expected to be usable for 7 years.

 The automobile has a salvage value of P40,000 and expected to be suable to 5 years.

 Payable half-month salaries, P4,680 for only one employee.

 Telephone bills payable the next month, P2,500.

 Seolhyun Services
Worksheet
For the month ended January 31, 2017

Unadjusted Adjusted Financial

Accounts Trial Balance Adjustments Trial Balance Profit or Loss Position
Cash
Accounts receivable
Notes receivable
Office supplies
Automobile
Equipment
Prepaid insurance
Accounts payable
Kim Seolhyun, Capital
Kim Seolhyun, Withdrawals
Service revenue
Salaries expense
Utilities expense
Rent expense

Office supplies expense

Insurance expense
Depreciation – equipment
Acc. dep. – equipment
Depreciation – automobile
Acc. dep. – automobile
Salaries payable
Utilities payable

Net Income

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 Seolhyun Services
Statement of Financial Position
January 31, 2017

ASSETS
Current Assets
Cash
Accounts receivable
Notes receivable
Office supplies
Noncurrent Assets
Prepaid insurance
Automobile, net
Equipment, net
TOTAL ASSETS

LIABILITIES AND OWNER’S EQUITY

Liabilities
Accounts payable
Salaries payable
Utilities payable
Kim Seolhyun, Capital
TOTAL LIABILITIES AND OWNER’S EQUITY

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 Statement of Comprehensive Income
For the month ended January 31, 2017

Service revenue
Less: Operating expenses
Salaries expense
Utilities expense
Rent expense
Office supplies expense
Insurance expense
Depreciation expense – equipment
Depreciation expense – automobile
NET INCOME
 Seolhyun Services
Statement of Changes in Equity
For the month ended January 31, 2017

Owner’s Equity, January 1, 2017

Investment by Kim Seolhyun
Net Income for the period
Less: Withdrawals by Kim Seolhyun
Owner’s Equity, January 31, 2017

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 Seolhyun Services
Statement of Cash Flows
For the month ended January 31, 2017

Cash flows from operating activities

Cash received from customers
Cash paid for supplies
Cash paid for insurance
Cash paid for salaries
Cash paid for utilities
Cash paid for rent
Net cash from operating activities

Cash flows from investing activities

Cash paid for equipment
Cash paid for automobile
Net cash from investing activities

Cash flows from financing activities

Cash investment by the owner 500,000
Cash withdrawal by the owner (15 , 000)
Net cash from financing activities

Increase in cash
Cash, January 1, 2017
Cash, January 31, 2017

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 Seolhyun Services
Post-closing Trial Balance
January 31, 2017

Accounts Debit Credit

Cash
Accounts receivable
Notes receivable
Office supplies
Automobile
Accumulated depreciation – automobile
Equipment
Accumulated depreciation – equipment
Prepaid insurance
Accounts payable
Salaries payable
Utilities payable
Kim Seolhyun, Capital

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